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A district court order denying applications under 28 U.S.C. §1728 to compel discovery for use in a trade secret lawsuit pending in Germany was reversed by the U.S. Court of Appeals for the Seventh Circuit Jan. 24 (Applications of Heraeus Kulzer GmbH v. Biomet Inc., 7th Cir., No. 09-2858, 1/24/11).

The court ruled that the district court erred by concluding that the plaintiff was seeking to circumvent German law and that compliance with the discovery request would be unduly burdensome to the defendant. Although the plaintiff's discovery requests were broad, the court said that it did not follow that the plaintiff was not entitled to any discovery, especially when the defendant refused to meet with the plaintiff to negotiate a reduction in the amount of discovery sought and refused to present any evidence of the burdens that granting the plaintiff's discovery request would impose.

Discovery Sought for German Lawsuit.

Heraeus Kulzer GmbH is a German company that makes bone cement, which is used in orthopedic surgery.

In the 1970s, Heraeus made a contract with Merck KGaA for Merck to distribute Heraeus's bone cement. In 1998, Merck then entered into a joint venture with Biomet Inc., a competitor of Heraeus.

In 2005, Biomet began making a bone cement that was a close substitute to Heraeus's product, which Heraeus contended incorporates Heraeus's trade secrets without authorization. Hereaeus then sued Biomet Inc. and its affiliates in a German court for theft of trade secrets, seeking hundreds of millions of dollars in damages and other relief.

Hereaeus applied to the U.S. District Court for the Northern District of Indiana--the district in which the Biomet corporate family is headquartered--to be permitted, pursuant to 28 U.S.C. § 1728, to conduct discovery of materials in Biomet's possession. Section 1728, in part, authorizes the federal court of the district in which a person resides or is found to order him to produce a document or other thing for use in a proceeding in a foreign tribunal.

Judge Robert L. Miller Jr. denied the applications to compel discovery for use.

No Circumvention of German Law.

Discovery is unobtainable in the German legal system, which does not authorize discovery in the sense of Rule 26 of the Federal Rules of Civil Procedure. A party cannot demand categories of documents from his opponents.

“The importance of American-style discovery to Heraeus's ability to prove misappropriation of its trade secrets by Biomet is undeniable. But potential for abuse? We don't see it,” Judge Richard Posner said. “Heraeus cannot obtain discovery it needs in the legal system in which it sued. And there is no indication that the German court … would refuse to admit evidence that Heraeus obtained through U.S. discovery …; no indication that the German court is worried about being swamped by … excessive discovery …; and no indication that the German court believes that Heraeus's discovery requests if allowed would impose an undue burden on Biomet.”

The court said that, in denying Heraeus's application, the district court committed two serious legal errors: (1) concluding that Heraeus was seeking to circumvent German law, and (2) turning down the discovery request flat out on the ground that compliance would be unduly burdensome to Biomet.

“At times the district court … suggested that Heraeus could get all the discovery it needed by invoking German discovery procedures, and at times the court suggested, contradicting the first suggestion, that by seeking more discovery than those procedures allow, Heraeus was affronting the German legal system,” the court said. “Both suggestions are incorrect.”

The court said that once a Section 1782 applicant demonstrates a need for extensive discovery for aid in a foreign lawsuit, the burden shifts to the opposing litigant to demonstrate that allowing the discovery sought would disserve the statutory objectives. Further, the court said that Heraeus was successful in the U.S. Court of Appeals for the Third Circuit in seeking discovery in the same case, where that court said that Hareaus presented “a textbook predicate for a successful § 1782 petition.” Heraeus Kulzer GmbH v. Esschem Inc.,390 Fed. App'x 88 (3d Cir. 2010).

Demands Broad, But Not Unduly Burdensome.

Next, the court said that although Heraeus's discovery demands are broad (reaching back fifteen years), it does not follow that Heraeus is not entitled to any discovery. “It's not as if its demands were frivolous; it obviously needs a good deal of discovery in order to prepare its case against Biomet,” the court said. “If it's asking for too much, the district court can and should cut down its request, but not to nothing, as it did. That was unreasonable, and therefore reversible.”

Biomet refused to meet with Heraeus to negotiate a reduction in the amount of discovery sought and refused to present any evidence of the burdens that granting Heraeus's discovery request would impose, the court said. “Rough estimates would have sufficed; none, rough or polished, was offered.”

“Biomet's refusal to lay any empirical foundation for its contention of undue burden, like its refusal to request an order from the German court regarding U.S. discovery and its refusal to meet with Heraeus to negotiate a reduced scope of discovery, is evidence that its objections to the discovery demands are indeed spurious,” the court said.

Thus, the court said that the district court's decision must be reversed and remanded for consideration of Heraeus's discovery demands under Fed. R. Civ. P. 26.

Senior Judge William J. Bauer and, sitting by designation, Judge Rebecca R. Pallmeyer of the U.S. District Court for the Northern District of Illinois joined the opinion.

Heraeus was represented by Susan M. Gerber of Jones Day, Cleveland. Biomet was represented by William N. Howard of Freeborn and Peters, Chicago.

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